Whether you're planning a relocation or looking for a fresh start in a different neighborhood, renting out your primary USDA home might have crossed your mind as a potential avenue for future income generation.
Consider this article your go-to guide for making important decisions. I've also included 5 key aspects you need to consider before renting out your USDA loan home, so you can feel prepared and excited about what lies ahead.
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72.6% of USDA home buyers are moderate-income earners, as per USDA classification.
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Qualification standards for these home loans are lenient, but you will need a steady income that's high enough to repay the loan over 30+ years at a fixed interest rate.
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USDA loans are only for primary residences.
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The USDA and lenders consider your household income when evaluating your eligibility. Generally, you can’t make more than 115 percent of the area’s median income.
Key Takeaways:
Understanding USDA Loans
Before we get to discussing the renting options, let’s first get a quick understanding of how a USDA loan works.
It is also known as the Section 502 loan program, available to borrowers since 1949, provides affordable financing options for people to buy a home. These loans are guaranteed by the Rural Housing Service agency of the United States Department of Agriculture.
When looking for a USDA loan, finding the best lender for a USDA loan can make a significant difference in your financing experience. This helps you qualify for better loan terms and gives you the flexibility to generate income if you decide to rent out your home in the future.
USDA loan has two programs that provide 100% finance:
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Section 502 Guaranteed Loan
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Section 502 Direct Loan
The program works by guaranteeing a 90% loan note to the banks & approved lenders that they'll get most of their money back if you can't pay your loan, so they're more willing to lend money to people with low to medium incomes to buy a decent and safe home in certain rural areas.
This loan is for people who have very low incomes and can't find a low-cost mortgage from other lenders. These people might also need access to good, safe, and clean housing. The usual loan term is over 33 years, but sometimes it can be as long as 38 years.
Occupancy Requirements of USDA Loan: How Does it Work?
It's important to note that these are distinct from the initial qualification criteria for obtaining a USDA loan.
Let’s have a detailed look at the requirements you need to meet to get your VA loan approved.
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Move-In Within 60 Days Of Closing Your Loan
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Ensure Your Home Meets Standards
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Verify Your USDA-Eligible Location
This means you need to start living in the house you bought with the USDA loan within two months after you finish all the paperwork and officially get the loan.
The house you're buying needs to be in good condition and meet certain safety and ensure USDA property standards. These standards make sure the house is safe and suitable for living.
When you apply for a USDA loan, it’s important to look for houses that are approved by the USDA. This usually means they are in rural or suburban areas, not in big cities. You can search online for the best USDA loan lenders list approved by the USDA to make sure the house is in the right location.
5 Key Considerations Before Renting Your USDA Loan Home
Once you match the above occupancy requirements you can rent out your USDA loan home but make sure you strictly follow all the USDA requirements.
Whereas if you want to rent out your home right away, you can't get a USDA loan. You'll have to use a different type of loan to buy your home, such as a conventional loan.
Now to the main discussion! Before you start counting the dollars rolling in, it's crucial to consider a few key factors, like:
1. USDA Guidelines
Ensure that renting out your home complies with USDA guidelines, as there may be restrictions on using the property for rental purposes.
2. Local Regulations
Familiarize yourself with local rental regulations and zoning laws to avoid any legal hiccups down the road.
3. Communicate With Your USDA Loan Lender
Keeping your lender informed ensures that you're compliant with the terms of your USDA loan. Some loan agreements may have specific requirements or restrictions related to renting out the property. It allows them to understand how the property is being utilized.
4. Financial Stability
Assess your own financial stability and consider how renting out your home may impact your overall financial situation. This will also help you to set the right rental prices and a proper strategy for generating income.
5. Property Management Assistance
Decide whether you'll manage the property yourself or enlist the help of a professional property management company. Keep in mind that this service comes with an additional fee. I recommend seeking their assistance only when you're generating sufficient income from your rental property.
Alright, if this is your first time dealing with renting out your property, don’t forget to check out these tips below.
4 Tips to Follow Before Renting Out Your USDA Loan Home
If you've lived in your home for years, a change of scenery can be refreshing. While generating rental income is crucial, it's essential to follow these tips to ensure that you're following the best practices.
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Research Property Prices Around You
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Screen Tenants
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Create A Lease Agreement
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Make Your Property Tenant-Ready
Be aware of the rental demand in your area to determine the potential rental income for your property. This helps you set competitive prices based on market trends and the condition of your property.
Conduct thorough background and credit checks on potential tenants to ensure they're reliable and financially stable.
Draft a comprehensive lease agreement outlining the terms and conditions of the rental agreement. You can consult with your lawyer if this is your first time.
Check if any necessary repairs, upgrades, or improvements need to be done. This will make it easier to attract tenants and charge higher rent.
Final Thoughts: Is Renting The Best Income Stream?
Renting out your USDA home can indeed be a viable income stream, but whether it's the best option depends on various USDA investment factors unique to your situation. It can help you offset mortgage costs and potentially increase your overall financial stability.
However, if rental income is a necessity for you, be aware of potential challenges that might arise. Consider your long-term objectives and whether you're prepared to handle the responsibilities.
Take your time to think it through and plan carefully. You'll figure out what works best for you in the end.
About the writer
Stephanie Trudeau
Reverse Mortgage
Expert